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The Point of No Return

Excise tax increases on tobacco could result in less revenue for states’ coffers.

September 26, 2010, 08:00 pm
By Mehgan Belanger

New Jersey: The not-so-humble suburbia that brought America “The Jersey Shore” and a “Real Housewives” series may be better known amongst the general public for these two pieces of shameful television, but c-store retailers know the Garden State as an example of when fiscal policies go wrong, time and time again.

No, I’m not referring to its property taxes, which are among the highest in the nation. I’m speaking of the now-infamous 2006 case where lawmakers increased the state cigarette excise tax despite warnings that it would drive smokers to cross borders and bring the tax to the inflection point, causing the state to bring in less money from the products than before.

But why bring up a four-year-old issue today? Because the state did it again in 2009, despite research that predicted the same result -- and it may not be alone.

In 2006, David Bishop, managing partner with research firm Balvor, then at the time with Willard Bishop, conducted a study predicting the result of a 35-cent per-pack hike, the proposed rate at the time.

“There might be some loss of sales, but at a higher profit it is possibly a good thing,” he said. However, “at some point, increasing the price will reach an inflection point -- the top of the curve -- and any increases subsequently will cause erosion of the value associated with the product.”

Passing the inflection point is exactly what happened in 2006, though the actual increase passed by the New Jersey legislature was 17.5 cents, half of the proposed hike. When Bishop returned to work with The Center for Policy Research of New Jersey on a similar issue in 2009, he found his 2006 estimates were modest. According to his latest analysis, New Jersey reported a fiscal year 2007 decline in excise tax revenue of 9.2 percent. This compares to his 2006 estimate of a 1-percent drop, equivalent to $7.8 million. Two other factors that exacerbated the plunge, which Bishop did not account for in his original estimate, were that the state raised its sales tax by a percentage point, to 7 percent, while also increasing the legal smoking age to 19.

The results of his 2009 study also painted a stark picture. Already at $2.58 in state excise taxes per pack, New Jersey proposed an additional 12.5 cents. Bishop’s analysis found that within the first fiscal year of the increase, revenues would decline $11.7 million from the combined losses for the state excise and sales tax. The actual figures were not available as of press time.

And looking at the projected impact on New Jersey tobacco retailers should be a warning to all c-stores.

The increase was predicted to translate to a loss of $185 million in top line sales for New Jersey cigarette retailers during the first year. This figure includes not only declines in tobacco sales, but also the ancillary products that accompany the purchases.

And from a consumer’s point of view, this tax hike fueled a money-saving fire. The retail price gap widened between New Jersey and Delaware, one of its border states. In 1998, New Jersey smokers could save 42 cents a pack by crossing the border. In 2009, it expanded to $2.09 a pack.

While Bishop has done no other studies on the impact of a cigarette tax increase on state revenues, he said New Jersey may not be the only state at or past its inflection point.

“States can’t simply raise taxes on tobacco and think revenue will increase,” he said, noting at some point, revenues will turn downward as consumers hit the price wall. “That is guaranteed as gravity.”